fv4 - price elasticity of supply

AP Microeconomics Study Guide: Price Elasticity of Supply

Page 1: Introduction to Price Elasticity of Supply (PES)

• Definition of PES

  • Measures a producer's sensitivity to price changes.

  • Similar to price elasticity of demand but focuses on supply.

• Example of PES

  • Firm A increases production to 12 headphones at $75.

  • Firm B increases production to 20 headphones at the same price.

  • Firm B's supply is more price elastic.

Page 2: Calculating Price Elasticity of Supply

• Formula for PES

  • ( Es = \frac{%ΔQs}{%ΔP} )

  • Where ( Es ) is the price elasticity of supply, and ( %Δ ) represents percent change.

• Example Calculation

  • Firm B:

    • Initial quantity supplied (Qs1) = 10

    • New quantity supplied (Qs2) = 20

    • ( %ΔQs = \frac{(20 - 10)}{10} \times 100 = 100% ) increase

    • Price change from $50 to $75:

      • ( %ΔP = \frac{(75 - 50)}{50} \times 100 = 50% ) increase

  • Resulting PES

    • ( Es = \frac{100}{50} = 2 )

    • Indicates a 50% price increase leads to a 100% increase in quantity supplied.

Page 3: Types of Elasticity of Supply

• Perfectly Inelastic Supply

  • Coefficient of 0; quantity supplied remains constant regardless of price changes.

  • Example: Monopoly products with no substitutes.

• Relatively Inelastic Supply

  • Coefficient between 0 and 1; slight responsiveness to price changes.

  • Example: Companies with high fixed costs (e.g., factories).

• Unit Elastic Supply

  • Coefficient of 1; proportional change in quantity supplied to price changes.

• Relatively Elastic Supply

  • Coefficient greater than 1; highly responsive to price changes.

  • Example: Companies with low production costs and high demand.

• Perfectly Elastic Supply

  • Infinite coefficient; quantity supplied increases infinitely with price increases.

  • Example: Commodities like wheat or corn.

Page 4: Key Concepts in Price Elasticity of Supply

• Elastic Supply

  • Significant changes in quantity supplied in response to price changes.

• Perfectly Elastic Supply

  • Quantity supplied changes infinitely with any price change.

• Price Changes

  • Variations in market prices due to supply and demand shifts affect consumer behavior and producer incentives.

• Price Elasticity of Supply Coefficient

  • Indicates how responsive quantity supplied is to price changes.

  • Helps understand market behavior and inform business strategies.

• Relatively Elastic vs. Inelastic Supply

  • Relatively Elastic: Small price changes lead to large quantity changes.

  • Relatively Inelastic: Significant price changes lead to small quantity changes.

• Unit Elastic Supply

  • Percentage change in quantity supplied equals percentage change in price.

Page 5: Conclusion

• Understanding PES is crucial for analyzing how producers adjust output levels in response to price changes, which is influenced by